This action, in which plaintiff Jays Foods (Jays) alleges that
it was a victim of predatory pricing, comes before this court ten
years after the seminal article by Professors Areeda and Turner
which outlined a cost-based definition of predatory pricing.
Areeda and Turner, Predatory Pricing and Related Practices Under
Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975).
Defendant Frito-Lay's (Frito-Lay) motion for summary judgment on
Count I requires this court to determine what fealty to give
cost-based tests of predatory pricing in light of a decade of
judicial responses to the article and its progeny. It also comes
in the wake of full and complete discovery. The question,
therefore, is whether there is sufficient evidence to create
triable issues.

I.

Frito-Lay is a national producer of a full range of salty snack
foods such as potato chips and pretzels. Its competitors include
regional suppliers of a more limited range of snack foods. Jays
is one of these regional competitors. Its primary product is
potato chips and its market consists of parts of Illinois,
Wisconsin, Michigan and Indiana.

In an antitrust case plaintiff has the burden of establishing
the relevant product and geographic markets. See L.A. Draper &
Son v. Wheelabrator-Frye Co., 735 F.2d 414 (11th Cir. 1984).
While Jays' complaint covers several products and geographic
markets, for purposes of the motion for summary judgment the
relevant geographic market is the Chicago area and the relevant
product is potato chips. The summary judgment motion is further
focused on the sale of potato chips in supermarkets. Supermarket
sales account for over 60 per cent of the total sales of snack
foods. The Chicago market is presumably the center of Frito-Lay's
allegedly illegal competitive practices, and is the largest
market served by Jays.

Potato chip sale levels are related to the amount of
supermarket shelf space available to a supplier. Sales levels are
also related to promotional incentives given stores and their
customers. Sufficient shelf space is also required to introduce
new products. Stores allocate shelf space to suppliers on the
basis of the sales of each supplier's products.

During the 1974-1980 period which is the subject of this
lawsuit,*fn1 Jays was the larger of the two potato chip suppliers in
the Chicago area. During the same period Jays was apparently
attempting to expand into other salty food product lines and
become a supplier of a full range of snack products. Both
companies' sales grew during this period. In 1974 Frito-Lay's
Chicago division had total sales of $7,559,630 and showed a loss
of $35,329. By 1980 its sales had nearly doubled to $13,545,170
and its profits had reached $1,057,830. The record does not
contain figures for Jays' performance in the Chicago market.
Jays' total net sales grew from $22,970,172 in 1974 to
$44,352,969 in 1980. Jays' pretax profits rose from $139,749 in
1974 to $2,319,620 in 1977, before tapering off to $948,557 in
1980. The record does not indicate what shifts occurred in each
company's share of the Chicago potato chip market.*fn2

The record makes clear that Chicago was one of the "problem"
markets for Frito-Lay. Frito-Lay faced strong local competition
in potato chip sales and its performance lagged relative to other
markets. Consequently, Frito-Lay devoted extra promotional and
advertising resources to the Chicago market. These promotions
included substantial price discounts, some of which were
unauthorized, and a strong emphasis on potato chips in the
supermarket display shelves ("overfacing").

The record suggests that Frito-Lay set its prices with an eye
towards competitive conditions. A summary of Frito-Lay's pricing
objectives identified three approaches to pricing based on market
conditions. In high-growth product categories, where Frito-Lay
had market leadership, prices were to be set "most aggressively."
In low-growth categories, where Frito-Lay had shared market
leadership, prices were to be less aggressive. Finally, in
"low-growth categories where we do not dominate we will price
competitively (e.g. potato chips)."

What is also evident from the record is that Frito-Lay's guide
in setting prices was its corporate financial goals. Its pricing
decisions were "designed to maintain total corporate gross margin
at target level of 50%."

The parties agree on the definition of predatory pricing as the
dominant firm's deliberate sacrifice of current revenues through
lower prices for the purpose of driving rivals out of the market.
Once it has vanquished its rivals, the dominant firm can more
than recoup its short-term losses through higher profits earned
in the absence of competition. MCI Communications Corp. v.
American Telephone & Telegraph Co., 708 F.2d 1081, 1112 (7th
Cir.), cert. denied, ___ U.S. ___, 104 S.Ct. 234, 78 L.Ed.2d 226
(1983). The parties disagree on the proper test for predation,
namely, the sufficiency of cost-based measures of predation and
the relevance of non-cost indicia of predatory intent.

The modern era of predatory pricing analysis was ushered in by
Professors Areeda and Turner. Areeda & Turner, Predatory Pricing
and Related Practices Under Section 2 of the Sherman Act, 88
Harv.L.Rev. 697 (1975). They argued that prices at or above
marginal cost, even if not profit-maximizing, generally should be
presumed to be non-predatory. Id. at 711. Marginal cost is the
"increment to total cost that results from producing an
additional increment of output." Because marginal costs are
difficult to determine, Areeda and Turner advanced average
variable cost as an acceptable surrogate for marginal cost. Id.
at 716-718. Variable costs are costs which vary in a short run
with changes in output. Such costs include items such as
materials, labor, fuel, use depreciation, and a return on
investment needed to attract enough working capital to pay for
variable costs. Average variable cost is total variable cost
divided by output. Fixed costs, in contrast, are costs which in
the short run do not vary with changes in output. Fixed costs
include such items as management expenses, interest on bonded
debts and other items of irreducible overhead. Total cost is the
sum of fixed and variable costs and average total cost is the
total cost divided by output. See generally Northeastern
Telephone Co. v. American Telephone & Telegraph Co., 651 F.2d 76
(2d Cir. 1981).

In Chillicothe Sand & Gravel the Seventh Circuit recognized the
centrality of the average variable cost test in the analysis of
a predatory pricing claim. It cautioned, however, that non-cost
factors were not to be neglected when determining whether a
defendant's pricing policy was predatory:

[W]hile we accept the use of marginal or average
variable cost as both a relevant and an extremely
useful factor in determining the presence of
predatory conduct we are willing to consider the
presence of other factors in our evaluation of
whether or not plaintiff has made out a prima facie
case of monopolizing or attempt to monopolize.

615 F.2d at 432. Indeed, after concluding that defendant's prices
were above average variable cost, the Chillicothe court went on
to consider and ultimately to reject a variety of non-cost
factors which plaintiff had argued revealed defendant's predatory
intent. Id. at 432-34.

In MCI Communications Corp. v. American Telephone & Telegraph
Co., 708 F.2d 1081 (7th Cir.), cert. denied, ___ U.S. ___, 104
S.Ct. 234, 78 L.Ed.2d 226 (1983), the Seventh Circuit confronted
allegations that AT & T had engaged in predatory pricing of two
of its services for long distance business communications. MCI,
708 F.2d at 1111. The issue at MCI was not the validity of the
Areeda and Turner average variable cost test; neither party ever
argued for application of a short run cost standard. 708 F.2d at
1115. While MCI noted some of the shortcomings of the average
variable cost test, id. at 1115-16, the decision cannot be read
as a repudiation of that test. In fact, the court expressly
stated that "pricing below average variable cost is normally one
of the most relevant indications of predatory pricing." Id. at
1120, n. 55.

Perhaps the strongest and most repeated criticism of the
average variable cost test of predatory pricing is its focus on
short term rather than long term costs. See e.g. Scherer,
Predatory Pricing and the Sherman Act: A Comment, 89 Harv.L.Rev.
869, 890 (1976). Then Professor Posner, for example, recognized
the usefulness of the Areeda and Turner average variable cost
formula, but concluded that predatory pricing also exists when a
company sells its product below its long-run marginal cost with
the intent to exclude a competitor. R. Posner, Antitrust Law, at
189. Long-run marginal costs are costs that must be recovered in
order for a business to survive into the indefinite future. Id.
Because all costs are variable in the long run, long-run marginal
costs include both the fixed and variable components of
short-term costs.

The legacy of Chillicothe and MCI is clear but incomplete.
There are two cost-based tests for predatory pricing. The average
variable cost test focuses on short-term cost. The long-run
incremental cost test measures the long-term cost caused by the
production of product. While non-cost factors are important
adjuncts to the cost-based tests, the cost tests play the central
role in the analysis of predatory pricing. The Seventh Circuit
has not indicated if it will follow the Ninth Circuit in holding
that prices above short-run total cost may in some circumstances
be predatory. It reasonably can be implied from MCI and
Chillicothe, however, that prices above average variable cost but
below average total cost might be predatory in light of striking
non-cost indicia of predation or unusual market conditions.

III.

For a predatory pricing action of this magnitude, the data on
prices and costs are disconcertingly meager (Ex. 41). Plaintiff
concludes that "since Frito-Lay does not regularly isolate total
cost for any division, including Chicago, these [cost] records do
not permit the determination of costs for potato chips sold in
Chicago." In its brief plaintiff devotes six pages demonstrating
that the cost data are incomplete and capable of various
interpretations. Plaintiff's position is that as a matter of law
it need not show that Frito-Lay priced potato chips below
applicable cost levels or, alternatively, that the inadequacy of
the cost data precludes summary judgment. Defendant argues that
it is entitled to summary judgment because the plaintiff has not
marshalled cost data in acceptable form and because the existing
data indicates that its prices were not predatory.

Plaintiff has undertaken its own analysis of average variable
cost for a single four-week period in 1976 (Ex. 68). It
determined that average variable cost exceeded sales revenue by
$3,559 during the period. When viewed in context, this finding
actually supports defendant's position. First, plaintiff
considered 99% of total manufacturing cost and 98% of total
non-manufacturing cost during the period to be variable, surely
an over-estimation given the short time span. Second, according
to the total cost study, Frito-Lay's loss during this four-week
period was its third worst of the 91 periods covered by the
study. Frito-Lay's loss during this period fell under the 1974
profit/loss average by $42,571. Corresponding figures for the
years 1975 through 1980 were $58,856, $153,719, $84,922,
$100,977, $169,227 and $236,196, respectively. That Frito-Lay's
revenues fell below average variable cost by only $3,559 in such
an abysmal performance period, and that this figure is based upon
questionable methodological assumptions, can only mean that
Frito-Lay's prices were above average variable cost in almost all
other periods.*fn6

Plaintiff appears to suggest that it is entitled at a minimum
to recover treble damages for each four-week period in which
Frito-Lay's potato chip revenues fell below its total cost for
the same period. Average variable cost and not total cost is,
however, the short-run cost measure. Even assuming that
Frito-Lay's average variable cost was above its revenue during
some four-week periods — a questionable assumption given
plaintiff's designation of all but a miniscule percentage of cost
as variable — it is doubtful whether plaintiff is entitled to
base its recovery on such short-term perturbations. It is unclear
from the cost study what degree of correspondence there is
between the revenue derived from sales during the period and the
costs allocated to that period. More importantly, given the
relatively long periods between Frito-Lay's price changes (Ex.
5), and the short-run fluctuations in costs shown in the cost
study, it is not evident that Frito-Lay priced below its
reasonably anticipated average variable cost. See Areeda &
Turner, Antitrust Law, ¶ 715(d) at p. 174.

While establishing that Frito-Lay was concerned about
maintaining adequate capacity in the face of rising demand and
that a variety of circumstances led on occasion to spot
shortages, plaintiff has done no more than establish that in
three out of seventy-six weeks Frito-Lay's plants nationwide were
operating at over 100% but under 110% of capacity. During a good
portion of the same period demand was apparently less than 50% of
capacity at the plant which supplied most of the potato chips to
the Chicago market. Even assuming that marginal costs did exceed
average total costs during several weeks — a questionable
assumption given the slight extent of the production over
capacity — and assuming that the Allen Park plant was
over-utilized — a fact for which there is no support — this court
would be reluctant to base liability on such short-term periods
of production over capacity levels. Such an approach would be
inconsistent with the purpose of the antitrust laws. Companies
would be reluctant to engage in vigorous price competition if
they faced treble damages for each period, no matter how short,
that their prices happened to fall below their marginal cost
because of unusually high production levels. Cf. Barry Wright
Corp., 724 F.2d at 234 (arguing against too
rigid an adherence to economic principles in antitrust analysis).

In a position related to the theory of price cross-subsidization,
Jays argues that Frito-Lay's purported failure to maximize its
profits in Chicago was conclusive evidence of predatory pricing. The
MCI court left no doubt of its rejection of the profit maximization theory:

[W]e must reject such "profit maximization" theory
as incompatible with the basic principles of
antitrust. The ultimate danger of monopoly power is
that prices will be too high, not too low. A rule of
predation based on the failure to maximize profits
would rob consumers of the benefits of any price
reductions by dominant firms facing new competition.
Such a rule would tend to freeze the prices of
dominant firms at the monopoly levels and would
prevent many pro-competitive price cuts beneficial to
consumers in other purchases. . . . It is in the
interests of competition to permit dominant firms to
engage in vigorous competition, including price
competition. We therefore reject MCI's "profit
maximization" theory and reaffirm this circuit's
holding that liability for predatory pricing must be
based upon proof of pricing below cost.

MCI, 708 F.2d at 1114 (footnote and citations omitted). In this
case Frito-Lay was not even the largest supplier of potato chips
for the Chicago market. Its adoption of non-profit maximizing
prices in response to Jays' competitive challenge was thus more
reasonable and more necessary than if it had been the dominant
supplier.

C. Entry Barriers

Jays describes the barriers to entering the snack food market
as "almost insurmountable." As common sense suggests, supermarket
sales of potato chips depend to a large extent upon the shelf
space allocated to a supplier. A supplier needs adequate shelf
space to compete successfully in the cacophony of kinds, colors,
shapes and sizes of the various snack food products and their
packages. Too little shelf space creates difficult supply
problems requiring frequent restocking. Inadequate shelf space
will also hinder expansion into new product lines. Supermarkets
allocate shelf space on the basis of sales. Because they allocate
shelf space relatively infrequently, and because of the tie
between shelf space and sales, shelf space once lost is difficult
to regain. Getting shelf space in the first place can be a
daunting task.

An important, but presently theoretical, issue not
directly before this court is the propriety of using
short-run marginal cost (as opposed to some measure
of average total cost) in predatory pricing cases
involving industries with high entry barriers . . .
there is some evidence that barriers to entry may be
high in the long distance telecommunications field.
There is also evidence, however, that the development
of microwave technology has significantly lowered
these barriers. Because the parties here have argued
from measures of average total cost we do not reach
this question.

Id. (emphasis added) (citation omitted). The MCI court never
considered the effects of entry barriers as part of its
application of the long-run incremental cost test.

In this case it is near certain that Frito-Lay priced its
potato chips above average variable cost. When all inferences are
drawn in plaintiff's favor it appears, however, that entry
barriers in the Chicago market might be high enough to cast some
doubt on the propriety of strict adherence to the average
variable cost test in the face of convincing non-cost evidence of
predatory behavior. MCI seems to indicate that the long-run
incremental cost test is unaffected by the presence of high entry
barriers. Here the long-run incremental cost data is too
rudimentary for a supportable conclusion that there has been
predation.

Jays also points to evidence of anti-competitive efforts by
Frito-Lay to increase its share of supermarket shelf space. When
all inferences are drawn in Jays' favor, it appears that some
Frito-Lay employees may have attempted to buy extra shelf space
and to sabotage supermarket tests of snack food sales in order to
obtain more space. While such evidence, if true, is not
conclusive of liability, this being after all a predatory pricing
case, it has some weight as circumstantial evidence of a
predatory scheme.

D. Expressions of Predatory Intent

Jays has culled from the Frito-Lay files various expressions of
competitive combativeness by Frito-Lay employees. Courts are to
approach purported expressions of predatory intent by company
officials warily:

The closest the evidence comes to a "smoking pistol" is a
statement in a memorandum:

Maximum Impact on Competition — By placing
incremental effort behind these low share markets, we
would maximize the effectiveness of our spending,
since these markets account for 77% of the volume of
our top five competitors and 77% of all branded
competition. This is significant since the bulk of
our major competition's volume/profit comes from
their potato chip business. Focusing our efforts on
potato chip growth is most likely to hinder
aggressive competitive expansion. (emphasis added)

This statement, however, is part of a discussion of where
Frito-Lay should focus its promotional resources and is not
directly connected to Frito-Lay's pricing policy. It is alone far
from conclusive on the issue of whether Frito-Lay engaged in
predatory pricing. The remaining intent evidence appears to be
primarily naive expressions of competitive zeal. In short, the
existing evidence of predatory intent has only some limited
weight as corroborative circumstantial evidence of Frito-Lay's
predatory intent. Standing by itself, the intent evidence is
wholly insufficient to establish Frito-Lay's predatory intent.

E. Price and Promotional Discrimination

Jays provide some evidence that Frito-Lay ran promotions
featuring price discounts longer in Chicago than in other markets
and generally devoted more merchandising resources to the zone of
which Chicago was a part. Even if true, these things do not
necessarily indicate predatory pricing. The same principles that
apply to Jays' product maximization and profit price
cross-subsidization arguments apply in this instance. So long as
Frito-Lay priced potato chips above its average variable cost and
its long-run incremental cost, then there is no compelling reason
to deny Chicago consumers the benefits of longer and greater
promotional discounts. While the social benefits of increased
advertising might be debated, there is nothing inherently
predatory about heavy advertising in highly competitive markets.

The parties have completed discovery and filed a massive
pretrial order. If the court denies Frito-Lay's motion for
summary judgment the parties will go to trial using exactly the
same body of evidence that they have drawn upon for their briefs.
This trial is optimistically estimated to last six weeks. It will
expose Frito-Lay to treble damages.

Jays simply has failed to make out even the outlines of a case
of predatory pricing. MCI makes clear that an essential element
of a predatory pricing case is proof that defendant's prices were
below average variable or long-range incremental costs. After
completing its discovery and after having many months to send
legions of experts through the thickets of cost data, plaintiff
has failed to come close to satisfying either cost standard. In
fact, to the extent it is usable, the available cost data
indicates that Frito-Lay's pricing policy was not predatory.

There are three contested issues with respect to Jays'
Robinson-Patman Act claim: whether Frito-Lay (1) discriminated in
price; (2) in the sale of goods of like grade and quality; (3)
such that competition was substantially lessened. Plaintiff's
motion is directed only at the first two issues. For purposes of
the motion Jays focuses only on the sale in the Chicago market of
supermarket-sized products within the categories of (1)
Lays/Fri-to-Lays; (2) Ruffles; and (3) flavored potato chips.

The extent to which a product is of like grade and quality as
another product depends on "the characteristics of the product
itself." FTC v. Borden Co., 383 U.S. 637, 641, 86 S.Ct. 1092,
1095, 16 L.Ed.2d 153 (1966). In Borden the court held that
evaporated milk produced and sold under the Borden name was of
like grade and quality as that which Borden produced for sale at
lower prices under other brand names. The physical and chemical
identity of the two products, rather than brand names and
consumer preferences, are conclusive of the like grade and
quality question. Id. at 639-640, 86 S.Ct. at 1094-1095.

Defendant emphasizes the physical differences between the
various lines of Frito-Lay products marketed in Chicago and
throughout the country. The likeness of grade and quality of, for
example, a plain potato chip and a flavored ridged potato chip
presents a genuine issue of fact which cannot be resolved upon a
motion for summary judgment. See Checker Motors Corp. v. Chrysler
Corp., 283 F. Supp. 876, 888-89 (S.D.N.Y. 1968), aff'd
405 F.2d 319 (2d Cir.), cert. denied, 394 U.S. 999, 89 S.Ct. 1595, 22
L.Ed.2d 777 (1969). Jays' motion, as this court understands it,
is directed instead towards establishing only that the various
lines of supermarket-sized Frito-Lay products sold in Chicago
were substantially identical to the same items Frito-Lay sold in
the same supermarket-sized packages outside of Chicago. So, for
example, barbecued potato chips sold in supermarket-sized
packages in Chicago are substantially identical to barbecued
potato chips sold in supermarket-sized packages elsewhere, but
not substantially identical to ridged potato chips sold in
supermarket-sized packages. The evidence supports this rather
unremarkable proposition.

Price discrimination under the Robinson-Patman Act "is merely
a price difference." FTC v. Anheuser-Busch, Inc., 363 U.S. 536,
549, 80 S.Ct. 1267, 1274, 4 L.Ed.2d 1385 (1960). Jays has
advanced evidence that Frito-Lay prices for its supermarket-sized
products were sometimes lower in the Chicago market than
elsewhere. Frito-Lay provides evidence that its prices were
sometimes higher in Chicago than elsewhere. Frito-Lay also argues
that the price differentials were simply inherited from the local
companies which it absorbed. See Dean Milk Company v. FTC,
395 F.2d 696, 700-03 (7th Cir. 1968). Summary disposition of this
issue is unwarranted in view of the uncertainty of the data. It
would seem, however, that the parties ought to be able to agree
on historical pricing data, thus eliminating the need for
evidence on that issue, and perhaps on post-1978 promotional
campaign discounts.

Conclusion

Defendant's motion for summary judgment on Count I is granted.
Plaintiff's motion for summary judgment on Count II is granted in
part within the parameters as set out in the opinion. Defendant's
motion for summary judgment on the Count II discrimination issue
is denied.

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